DOJ Joins FCC in Picking Wireless Winners and Losers

Scott Cleland is a precursor: a proven thought leader with a long track record of industry firsts. Cleland is President of Precursor® LLC, a Fortune 500 research consultancy specializing in the future of Internet competition, property rights, privacy, cyber-security and cyber-ideology; algorithmic markets; and communications competition and de-regulation. Cleland authors the widely-read PrecursorBlog and serves as Chairman of NetCompetition® a pro-competition e-forum supported by broadband interests. A world-leading research authority on Google, Cleland authored the book: Search & Destroy: Why You Can't Trust Google Inc. and is publisher of the watchdog site Google Monitor. Cleland served as Deputy United States Coordinator for Communications and Information Policy in the George H. W. Bush Administration. Eight Congressional subcommittees have sought Cleland’s expert testimony and Institutional Investor twice ranked him the #1 independent analyst in his field. Scott Cleland has been profiled in Fortune, National Journal, Barrons, WSJ’s Smart Money, and Investors Business Daily. Ten publications have featured his op-eds. For a full bio see: www.ScottCleland.com.

The DOJ has joined the FCC in trying to pick market winners (Sprint/T-Mobile) and losers (Verizon/AT&T) in the U.S. wireless market.

Recent public filings by the DOJ and the FCC spotlight their reticence for wireless competition policy and market-driven spectrum auctions. They also show a strong predilection for preemptive and interventionist wireless regulation.

Specifically, the DOJ just sent an analysis to the FCC. It urges the FCC to establish spectrum auction regulations that would effectively deny new scarce radio spectrum to wireless market leaders, Verizon and AT&T, and effectively steer it to the “smaller nationwide networks,” Sprint and T-Mobile.

Just a few weeks ago in its annual wireless competition report to Congress, the FCC could not bring itself to declare that effective wireless competition exists.

Never mind the FCC’s own analysis shows the U.S. market is the most competitive it has ever been. Never mind it’s more competitive than most any other nation. And never mind, by most every competitive measure — pricing, speed, investment, deployment, availability, innovation and consumer satisfaction, competition is vibrant.

This tortured FCC decision to deny the obvious is a not-so-subtle signal that the FCC is bent on implementing some form of preemptive spectrum cap regulations that the FCC could not justify if it found the wireless market competitive.

What’s wrong with this FCC/DOJ approach?

First, such regulations will turn a competitive-market-based auction, driven by market supply and demand, into a less-competitive, rigged “auction” where everyone knows ahead of time to which companies the government wants to steer the new available spectrum.

A free and fair auction is just like free and fair trade – the outcome is based on competition, supply, demand, and price, not government pre-selections and regulation.

Second, the DOJ is speculating that two larger players will buy spectrum that they don’t really need in order to keep it from two smaller competitors.

If the DOJ is urging an auction policy grounded on DOJ speculation, why don’t they also consider the more obvious potential anti-competitive effects of preemptively and artificially limiting auction competition from four to two bidders?

Wouldn’t their two chosen bidders have a greater incentive to collude to foreclose the opportunity for the U.S. taxpayer to reap the benefit of being paid the highest market value for the spectrum?

Third, such regulations could shortchange the American taxpayer billions of dollars in foregone auction revenues, and not reduce the Federal budget deficit and debt as much as a free and fair auction would.

That’s because specifically excluding the two bidders — with the most subscriber demand for spectrum capacity and the most financial wherewithal to bid — will substantially reduce the winning prices for spectrum.

Fourth, the FCC has an abysmal track record of picking market winners and losers.

For example, the FCC’s heavy-handed implementation of the 1996 Telecom Act overtly picked the CLECs as market winners and the Bells as market losers. The FCC imposed one-sided uneconomic price regulations and terms, which predictably fueled a CLEC market bubble and subsequent market crash. All of the FCC’s chosen-winner-CLECs went bankrupt.

Another example, the FCC tried to steer the last 700 MHz public safety auction so tightly that no one bid. The ignominious result is that twelve years after 9-11, the FCC still has not been able to implement the 9-11 recommendation to create an interoperable public safety wireless network.

Fifth, the DOJ’s central market analysis and assumption here are incorrect. In a zealous attempt to lend support for FCC regulatory intervention, the DOJ (on page 12) contrived a flawed market analysis conclusion that Verizon and AT&T are “the dominant firms” in wireless.

The DOJ unnecessarily has created a credibility problem for itself here.

Legally, the word “dominant” is singular not plural. Dominant means first and foremost, not the top two. Verizon and AT&T logically can’t both be “dominant” at the same time; either one is dominant, or none is dominant.

Under the DOJ’s own guidelines, a firm is “dominant” with 50+% share — meaning every other competitor by definition is non-dominant. Neither Verizon nor AT&T have anywhere near 50+% share of the relevant market.

Language matters. If the DOJ meant to just imply the existence of market power, they should stick to that legal term, not employ the pejorative term “dominant,” for two wireless providers, when they know they can’t prove that factually based on their antitrust expertise.

This assertion of two “dominant” wireless providers imagines incorrectly that Verizon and AT&T somehow don’t compete against each other when they obviously do.

Lastly and most importantly, if the DOJ and FCC truly believe that the supply of spectrum is so important to wireless competition, why have they done so little publicly to rectify the federal government’s hoarding, waste and mismanagement of spectrum?

This huge and artificial governmental constriction of overall spectrum supply is the overriding reason for scarcity of commercial spectrum — not Verizon or AT&T speculated potential actions.

The federal government claims that it can’t spare any more of its spectrum for auction when it controls ~85% of the nation’s radio spectrum suitable for wireless broadband, but only uses 1% of the nation’s energy; provides 8% of the nation’s employment; produces 12% of the nation’s GDP; and gets by with 30% of the nation’s land?

The facts expose an enormous public-private imbalance between the Government’s unjustifiable and wasteful hoard of spectrum supply and the private sector’s huge unmet demand for more spectrum supply over time.

Tellingly, the private sector has a wireless spectrum utilization rate as much as ~80 times greater than the Government’s.

This spectrum hoarding and waste is only able to continue because spectrum is the only federal asset that has no modern management system, no inventory or utilization measurement, and no budget or accountability system.

It is the single biggest “good government” management scandal facing the federal government today.

In sum, there is no long-term, private-sector, spectrum-competition problem requiring FCC preemptive regulation. However, there is a deeply dysfunctional federal spectrum management pipeline problem in dire need of attention that the FCC, DOJ and the rest of the Government appear to be ignoring.

The longer the FCC and DOJ keep their head in the sand about the obvious state of federal spectrum mismanagement, the more clear it becomes that they are less interested in promoting wireless competition, and more interested in promoting regulation of the wireless industry.